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Last Updated: 3 December 2005
THE SUPREME COURT OF APPEAL
OF SOUTH
AFRICA
Reportable
Case no: 346/04
In the matter between:
THE MICRO FINANCE REGULATORY
COUNCIL Appellant
and
AAA INVESTMENT (PTY)
LIMITED First Respondent
THE MINISTER OF TRADE &
INDUSTRY Second
Respondent
_____________________________________________________
Coram: Mpati
DP, Streicher, Navsa, Nugent JJA et Combrinck AJA
Date of
hearing: 26 August 2005
Date of delivery: 21 September
2005
Summary: Private regulator appointed for
micro-lending industry ─ s 21 company ─ entitled to make rules in
terms of its memorandum
of association ─ whether making of such rules
constituted the exercise of public powers requiring legislative authority.
_____________________________________________________
JUDGMENT
_____________________________________________________
NAVSA et
NUGENT JJA:
[1] ‘Neither a borrower nor a lender be;
For
loan oft loses both itself and friend,
And borrowing dulls the edge of
husbandry.’[1]
Shakespeare’s
words are lost in the reality of the modern commercial
world.[2] The poor, especially, are
exponentially becoming borrowers[3] in
what is known as the micro-lending industry, which, as the name suggests, is the
industry in which lenders principally provide
credit to low-income earners in
relatively small amounts, at high monthly interest rates, justified on the basis
of high risk.
[2] The present appeal concerns the regulation of the
micro-lending industry in South Africa and, more particularly, the powers of
a
statutorily approved regulator.
[3] Historically, persons who earned low
incomes could not obtain credit from established banks or other financiers. The
main reason
for this was that such institutions were subject to interest rate
limitations imposed by the Usury Act 73 of 1968 and were loath
to lend money to
low-income earners because of the perceived risk of default and the
disproportionate cost of advancing small loans.
Section 15A of the Usury Act,
however, permits the responsible Minister to exempt categories of money-lending
transactions from
its provisions on such conditions and to such extent as he or
she may deem fit. [4]
[4] In 1992, the then responsible Minister, in response to
representations, exempted certain categories of small loans from its interest
rate restrictions. As a result, a burgeoning micro-lending industry came into
existence.[5] Predictably, abuses
resulted in this industry, which, at the time, was unregulated. Government
threatened to withdraw the exemption.
The second respondent, the Minister of
Trade and Industry, who is presently the responsible Minister in terms of the
Usury Act, took
advice from an advisory panel about the best manner in which to
regulate the industry. He consequently decided that he would do so
through an
approved independent private body in which all interested parties would be
represented.
[5] On 1 June 1999 the Minister issued a notice under s 15A
of the Usury Act in terms of which he exempted micro-lending transactions
from
the provisions of the Usury Act but only on condition that:
‘(a) the
entity concluding the ... money lending transaction is registered as a lender
with a regulatory institution; and
(b) the lender shall at all times comply
with this notice.’
The notice defined a ‘regulatory
institution’ as a legal entity that, amongst other things, is approved by
the Minister
as having the capacity and mechanisms to ensure compliance by
lenders with the notice.
[6] The notice went on in annexure A, entitled
Rules for Purposes of Exemption Under Section 15A of the Usury Act, to
set out various rules in protection of the interests of borrowers, such as
methods of confidentiality of transactions, disclosure
to borrowers and methods
of collection of repayments.
[7] On 16 July 1999 the Minister gave
notice that the appellant, a company that was incorporated in terms of s 21 of
the Companies
Act 61 of 1973, was an approved regulatory institution as
contemplated by condition (a) of the exemption notice. The Minister must
have
given his approval in the knowledge and with the intention that the company
would henceforth ensure compliance with the terms
of the exemption notice, and
would regulate the industry in accordance with its own powers as conferred upon
it by its memorandum
of association.
[8] The appellant company came
into being in anticipation of being appointed as a regulatory body for the
micro-lending industry.
The founding members of the company included Government
and representatives of the micro-lending industry and consumers. We shall
for
the sake of convenience refer to the appellant as the company.
[9] The
company’s memorandum of association states that its main object is
‘to promote the common interests of money lenders
advancing small loans
through the regulation of the small loans industry’.
[10] The
specific powers of the company, provided for in its memorandum of association,
include the power:
‘To make and enforce rules to be complied with by
money lenders advancing small loans registered with the company and any category
of small loans in particular.’
[11] In the exercise of its powers in
terms of its memorandum of association the company made a set of rules that were
later revised.
Amongst other things, both sets of rules allow for lenders to
register with the company. A lender who wishes to be registered with
the company
is required to complete and to submit an application for registration. In the
application form the lender undertakes
to abide by the provisions of the Usury
Act exemption and the rules of the company. Upon acceptance of the application
by the company,
and registration of the lender, the lender becomes contractually
obliged to abide by the exemption to which we have referred and
by the rules
made by the company. Those rules provide, amongst other things, for the manner
in which the lender must conduct various
aspects of his or her business and for
the exercise by the company of discipline over the lender.
[12] Apart
from that, the detailed provisions of the initial and the revised rules are not
material to this appeal except in one respect.
The revised rules (Rule 6)
require lenders to submit to an ‘information broker’ (a person
appointed by the company to
maintain a national loans register) ‘accurate
data in respect of all loans granted for the purposes of such data being
captured
on the national loans register.’ The purpose of the national
loans register is to enable lenders, by consulting the registrar,
to determine
whether a borrower will be able to make loan repayments. (One of the revised
rules prohibits lenders from making a loan
without first being satisfied that
the borrower will be able to do so.)
[13] Thus the effect of the various
measures to which we have referred is that in order to conduct micro-lending
transactions a lender
is required, as a condition of his or her exemption from
the provisions of the Usury Act, to register with the company. By registering
with the company the lender binds himself or herself to the company
contractually to abide by all its rules, and with the ministerial
rules that are
contained in the exemption notice.
[14] The first respondent is a company
with limited liability, incorporated in terms of the Companies Act, operating in
King Williamstown
in the Eastern Cape as a micro-lender, advancing small, short
term loans in return for interest. It advances loans of up to R3 000-00
with a
maximum loan repayment period of six months.
[15] After the Minister
approved the company as a regulatory institution, the first respondent duly
registered with it as a lender
and appears to have conducted its business within
the company’s rules.
[16] During June 2001 the company announced
its intention to introduce the revised set of rules. This spurred the first
respondent
into objecting to the proposed changes to the rules. It alleged,
inter alia, that the rules introduced by the company were
unconstitutional on various grounds, and it threatened legal proceedings. Its
principal
objections related to the introduction of the national loans register
with the concomitant obligation upon lenders to submit information
for inclusion
in the register, and the prohibition upon lenders making loans without first
satisfying themselves that the borrower
was able to make the required
repayments.
[17] After the company introduced its revised rules on 1
July 2002 it informed the first respondent that the introduction of the national
loans register was to promote responsible lending. The Department of Trade and
Industry, responding to the first respondent’s
objections (apparently on
behalf of the Minister), whilst not taking a final position on the issue before
legal proceedings commenced,
stated that it considered the changes to the rules
as not infringing the provisions of the Constitution.
[18] The first
respondent then launched an application in the Pretoria High Court for various
forms of relief that were all aimed
at invalidating the company’s initial
and revised rules.
[19] The grounds upon which the first respondent
sought to attack the validity of the rules in its application went beyond those
that
it had advanced earlier. Apart from the various constitutional grounds upon
which it had earlier relied the essence of the first
respondent’s attack
upon the validity of the rules and which formed the core of its argument before
us, was this: It submitted
that the company, by making rules that bound lenders
in the industry, was purporting to exercise public regulatory powers, and that
it had no legislative authority for doing so. To phrase it in language that was
used by the first respondent, it was submitted that
by making the rules the
company was purporting to legislate, without any constitutional or other
legislative powers to do so. Its
further submission, repeating an objection that
it had made earlier, was that the rule requiring disclosures to be made for the
purposes
of the national loan register (which was introduced with the revised
rules) was in conflict with s 14 of the Constitution, which
guarantees the right
to privacy.
[20] The application to the High Court succeeded and the
rules were set aside. The learned judge in the court below reasoned that
in
making rules that bound participants in the micro-lending industry the company
was purporting to exercise legislative powers,
which it had no authority to do.
In view of his finding it was not necessary for the learned judge to consider
the further constitutional
challenge to the validity of the rules. This appeal
against that decision is before us with the leave of the court
below.
[21] Before turning to the merits of the appeal there is a
preliminary matter that can be disposed of briefly. On 8 August 2005, subsequent
to the filing of the heads of argument by the parties, the Minister repealed the
notice by issuing a new exemption
notice,[6] which also embraced all the
rules adopted by the company. It was contended on behalf of the first respondent
that this rendered the
dispute academic and that the appeal should be dismissed
on the grounds set out in s 21A of the Supreme Court Act 59 of 1959, namely,
that any judgment or order would have no practical effect.
[22] We
disagree. The company and the Minister both contend that the company has the
right to continue making rules and do not rule
out the possibility of such rules
being made in the future. Furthermore, the company correctly points out that it
has regulated the
affairs of lenders and borrowers who have subscribed to its
rules and that they, and it, thus require certainty in relation to their
existing and future rights and obligations. It is clear that a decision by this
Court will have a practical effect.
[23] The object of the company in
terms of its memorandum of association is to make and to enforce rules that are
to be complied with
by micro-lenders that are registered with the company. That
is not an unlawful object, whether under the Usury Act or otherwise,
and the
achievement of that object is not inconsistent with the terms upon which the
Minister approved the company as a regulatory
institution. On the contrary, the
company was approved by the Minister precisely to assume that function.
[24] The attack upon the validity of the rules made by the company, on
the grounds that it was not authorised to make the rules, is
in our view
misconceived. That attack proceeds from the premise that the company is a public
regulatory authority that is purporting
unilaterally to impose a regulatory
regime on micro-lenders. That is not correct. The company is not, and does not
purport to be,
a public regulator with authority unilaterally to exercise powers
over outside parties. It is a company that conducts business as
a private
regulator of lenders who choose to submit to its authority by agreement. In
regulating micro-lenders who agree to such
regulation it does not purport to be
exercising legislative or other public powers that require a constitutional or
legislative source.
It purports only to regulate those who are willing to
submit to its regime and the source of its authority to do so is their consent.
[25] Moreover, insofar as the consent of lenders to submit to that
regime might be said to be extracted by coercion, the source of
that coercion is
not the rules of the company, or its act in making those rules, but is rather
the provision of the exemption notice
that compels any person who wishes to
conduct business as a micro-lender to submit to the company’s regulatory
regime. We
are not called upon in this appeal to consider whether the Minister
was entitled to assert that coercion by requiring lenders to
submit to that
private regulatory regime as a pre-condition to engaging in micro-lending and we
do not do so. The first respondent
has pointedly refrained from attacking the
validity of the exemption notice and the conditions that it contains. There is
also no
attack in the present proceedings upon the validity of the first
respondent’s consent (or that of other micro-lenders) to abide
by the
company’s rules, whether on the grounds that it had no alternative but to
do so if it wished to conduct business or
on any other grounds. The first
respondent’s attack is directed solely to the validity of the
company’s act in making
the rules.
[26] The validity or otherwise
of the company’s act in making the rules does not fall to be determined
with reference to principles
of public and constitutional law, as contended for
on behalf of the first respondent, because the company does not purport to be
exercising public powers of legislation. On the contrary, it purports only to be
making rules that will be binding upon those who
agree to abide by them, in
pursuance of the business that it conducts as a private regulator. The validity
of its act in making those
rules falls to be determined with reference to trite
principles of company law and in particular, whether it was empowered by its
memorandum of association to do so. We have already referred to the material
power conferred upon the company by its memorandum,
which clearly authorised it
to make the rules. In those circumstances the attack upon their validity on
those grounds ought to have
failed.
[27] The invasion of privacy attack
on the revised rule relating to the submission of information for purposes of
the national loan
register is based on the view that the rule operates within
the public and constitutional law sphere. It was never suggested that
consent to
such a rule in the private law context is impermissible either in terms of the
Constitution or otherwise. We were, in
any event, not called upon to address
that question. In the light of the conclusions set out above it is unnecessary
to consider
this point any further. For these reasons the appeal is upheld with
costs, including the costs of two counsel. The order of the court
below is set
aside and the following order is substituted:
‘The application is
dismissed with costs including the costs of two counsel if
applicable.’
_________________
M S NAVSA
JUDGE OF APPEAL
_________________
R W NUGENT
JUDGE OF
APPEAL
CONCUR:
MPATI DP
STREICHER JA
COMBRINCK AJA
[1] Polonius to Laertes in
Hamlet Act I Scene
III
[2] In a proposal for a
directive of the European Parliament and of the Council on the harmonisation of
the laws, regulations and administrative
provisions of the Member States
concerning credit for consumers dated 11 September 2002, the following appears:
‘Today credit
is made available to consumers via a wide range of financial
instruments and it has become the lubricant of economic life...
In
macroeconomic terms the amount of credit circulating in the 15 Member States of
the European Union exceeds EUR 500 000 million
corresponding to more than 7% of
GPD.’
[3] According to the
research of Professor PG Du Plessis of the University of Stellenbosch –
The Micro-lending Industry in South Africa, July 1998 – it was
estimated that 80% of South Africa’s adult population were denied access
to retail credit within the mainstream
financial services industry. The research
indicated the size of the cash loan industry to be approximately R10.1bn-R15bn
and that
it increased by 280% over the past two years. It also showed that there
are over 3 500 formal lending agencies and over 27 000 informal
lending outlets
with a large geographic dispersion. Statistics indicate a current and near
future individual market of approximately
3 million
borrowers.
[4] Section 15A
provides: ‘The Minister may from time to time by notice in the
Gazette exempt the categories of money lending transactions, credit
transactions or leasing transactions which he may deem fit, from any
or all of
the provisions of this Act on such conditions and to such extent as he may deem
fit, and may at any time in like manner
revoke or amend any such
exemption.’
[5] See fn 3
above.
[6] Government Notice 1407
of 2005 in Government Gazette 27889.
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